Refinancing your Home
Lower rates provide opportunity to refinance your home loan.
What is refinancing?
Taking out a new home loan to pay off your old mortgage loan. You might do this because of lower interest rates, to reduce a monthly payment or to cash out equity earned in the property.
Why you should refinance to:
- Reduce your monthly payment, especially with a lower interest rate. And especially if your credit score has increased.
- Receive equity back, from saving on a smaller house payment.
- Pay off your home loan faster
- Switch loan types (i.e., from an adjustable to a fixed-rate loan)
Reasons to consider why you shouldn’t refinance:
- To consolidate debt: On the surface, paying off high-interest debt with a low-interest mortgage seems like a smart move, but there could be potential risks. If you are transferring unsecured debt (such as credit card debt) into debt that is backed by your home as collateral, you risk losing your home with foreclosure for nonpayment. Whereas, if you are unable to make your credit card payments, it will negatively reflect your credit score and that is usually not as dire as a foreclosure.
- To extend the length of your home loan: prolonging the pay-off date of your home loan will mean paying more in interest over the long term and you will have many more months to pay the loan off.
- To take out cash for investing: Extra cash is sometimes too tempting for extraneous spending. However, if you are disciplined and will use the extra money to seriously invest—or to build your emergency fund—this can be a good option. Remember though, that paying down a mortgage at a lower rate is better than putting your cash into a low rate CD. Understand both the risks and potential upsides before playing with the equity in your home.
The steps to refinance:
- Determine why you want to refinance—e.g., to shorten your payment or loan term.
- Research mortgage refinance rates to get the best terms for your credit score
- Apply with a lender, or several, to secure the best for your loan
- Lock in your rate
- Close on the loan
Remember, refinancing is the same process as getting a first mortgage. There may be closing costs and appraisal fees that will add to overall costs. Also, be aware of other costs such as prepayment penalties for your original mortgage. These costs may affect your total cost savings. For example, if you spend $5000 to refinance and the resulting payments are $100 less than your original house payment, it will take you 50 months for the refinance move to be worth it.
For refinancing your home loan with Skyward, go to skywardcu.com/home-loans#refinancing-a-home.